Potash Corp. of Saskatchewan, Inc. Q2 2010 Earnings Call Transcript

 |  About: Potash Corporation of Saskatchewan Inc. (POT)
by: SA Transcripts


Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Potash Corp. Second Quarter Earnings Conference Call. At this time, all calling participants are in a listen-only mode. Following the presentation we will conduct a question-and-answer session. (Operator Instructions)

I would like to remind everyone this conference call is being recorded on Thursday, July 29th at 1 PM Eastern. I will now turn the conference over to Denita Stann, Senior Director, Investor Relations. Please go ahead.

Denita Stann

Thanks, Rick. Good afternoon. Thank you for joining us. And welcome to our second quarter earnings call. In the room with us today, we have Bill Doyle, our President and CEO; Wayne Brownlee, our Executive Vice President and Chief Financial Officer; David Delaney, Executive Vice President and Chief Operating Officer; Joe Podwika, Senior Vice President and General Counsel; Garth Moore, President of PCS Potash; Tom Regan, President of PCS Phosphate and PCS Nitrogen; and Stephen Dowdle, President of PCS Sales. I’d like to welcome the media who are listening in and remind people that we are live on our website.

I would also like to remind everyone that today’s call may include forward-looking statements. Such forward-looking statements are given as of the date of this call and involve risks and uncertainties. A number of factors and assumptions were applied in the formulation of such statements and actual results could differ materially. For additional information with respect to forward-looking statements, factors, and assumptions, we direct you to our news release and our most recent Form 10-K.

Also today’s news release, which is posted on our website, includes a reconciliation of certain non-GAAP financial measures to the most directly comparable GAAP measures.

I’ll now turn the call over to Bill Doyle for some comments and then we’ll go to questions.

Bill Doyle

All right. Denita, thank you, and good afternoon, everyone. Thank you for joining us for this discussion of Potash Corp’s second quarter performance and our outlook as we enter a very promising time for our company.

Over the past year, investor questions have had a common theme. The people wondering when we will reach an inflection point for potash, a point where demand reemerges, supply tightens and pricing opportunity returns. It has been a difficult question to answer, but recent supply and demand developments lead us to believe that we are rapidly approaching that important juncture.

Our results for this quarter demonstrated once again that the realities of global food production are taking hold and igniting improved demand for the fertilizer industry. Tighter grain and oilseed inventories, along with supportive prices for crop commodities, led farmers in most growing regions to pursue the economic opportunity that comes with increased production and return to the practice of replenishing essential nutrients in their soils.

This was particularly evident in potash, as volumes for our core nutrient were nearly five times the level of last year’s second quarter. With a notable exception of China, where adverse weather impacted spring planting and fertilizer use, virtually every major potash market moved closer to historical consumption patterns.

Our performance this quarter and for the first six months of 2010 reflected ongoing improvement in fertilizer markets. We generated earnings of $1.55 per share, more than double the same quarter last year. This is the second consecutive quarter of strong earnings, increasing our first half total to $3.02 per share or $921 million, almost matching our full year 2009 earnings.

The unique potential of potash is reemerging and this enabled us to triple our gross margin from last year’s second quarter. It also led to increased contributions from our equity investments in other global potash producers.

We believe a strong foundation has been re-established and that fertilizer buyers and food producers around the world are preparing to take on the significant challenge of meeting food demand in the months and years ahead.

During the quarter, however, the positive fundamentals that underpin our industry appear to be overshadowed by lingering questions about the debt levels of certain European countries and the pace of global economic recovery. This overlooks the fact that on a long-term basis, agriculture operates on a different platform than other industries.

Keeping pace with global food demand is not a choice, it is an ongoing necessity. We believe this demand will support a powerful period of growth for agriculture, especially in North America, which exports more crop commodities than any other region in the world.

The bottom line is that the long-term drivers of our business remain solidly in place and the catalysts that fuel near term-fertilizer demand are accelerating. In recent weeks, pressure on grain and oilseed inventories has become more pronounced, with global grain consumption projected to once again exceed production this year.

After consecutive years of ideal growing conditions in most regions, many people began to think of record crops as the norm, taking the world’s food supply for granted and discounting the realities of crop science.

This year, adverse weather conditions are impacting production in several key growing regions. In Russia, grain production is expected to decline by around 20%, while Canadian wheat production is forecast to be down 23%.

China, which places a priority on food self sufficiency, is facing significant challenges as a result of adverse weather and nutrient imbalances. This year, China is expected to import over 75% of its soybean requirements at the rate of around 1 million tonnes per week, along with significant volumes of corn for the first time since 1996.

Even with the potential for a record crop in United States, the corn stock to use ratio is projected to be at its lowest level in seven years. This pressure on global supply has driven up futures prices for corn, soybean and wheat by 10% to 30% since the end of the second quarter and further improved farm economics from already supportive levels.

To increase yields, farmers must address nutrient deficiencies created by a combination of record harvests and reduced fertilizer applications. While this is a long-term process, it is well underway, with buyers in most regions purchasing potash volumes at near pre-recession levels.

This rapid recovery resulted in estimated global shipments in the range of 25 million to 27 million tonnes for the first six months of 2010. That is within 10% of the record first half demand achieved in 2008. We anticipate ongoing engagement by these key markets in the back half of the year as well.

For the first time in several growing seasons, North American farmers expect to have a longer fall application window, while Latin American customers are actively purchasing to meet demand for their primary planting season. India could reach record import volumes by the end of the year and China is likely to purchase some additional volumes in the second half.

Potash demand from other Asian countries provided the largest market for Canpotex during the first half of 2010. Demand in this region is expected to remain very strong, driven by supportive grower economics and the importance of potassium to high value crops like oil palm.

With this continuing recovery and demand and scheduled maintenance shutdowns, we expect potash supply and producer inventories will tighten in the third quarter. For the year, we expect global potash consumption will reach approximately 50 million tonnes, a significant step forward following the unprecedented decline in 2009.

Keep in mind, we anticipate this level of demand will be reached without the full engagement of China, historically, one of the world’s largest markets and does not include the necessary restocking of the global supply chain.

As we look ahead to 2011, we expect China will return to its pre-downturn consumption level, which is approximately 11 million tonnes. With pressures on grain reserves mounting, China’s Ministry of Agriculture is redirecting efforts to improve food production. This includes a renewed investment in agricultural education and an extension of its free soil testing service.

As we have seen in the past, when China becomes fully engaged, it can move forward with giant steps. Over the past 20 years, its annual potash consumption growth has averaged almost 10%. In eight of those 20 years, its growth has been greater than 10%.

The prospect of a hungry and growing market in China creates a very positive operating environment in the years ahead. With full engagement anticipated from all key major markets in 2011, we believe global consumption could rise to approximately 55 million tonnes, close to the historical trend line.

The other part the of equation is supply and we estimate the global potash producers will have operational capability of approximately 60 million tonnes next year. Given anticipated demand, this would result in operating rates higher than 90% of capability, reflecting a historically tight market.

While fertilizer buyers have been confident that the needs of their customers would be met just in time purchasing over the past two years, tighter supply demand fundamentals could shake them out of this purchasing mindset, as concerns over product availability and the potential for higher prices provide motivation to rebuild inventories.

We believe the process of refilling the global distribution chain would require another 5 million tonnes of Potash. If restocking begins in 2011, this could lead to demand in excess of our current estimates.

Over the past two years, our company has remained true to our long held strategy of matching supply to demand, taking significant production cutbacks during challenging times. At the same time, we executed on our Potash First strategy and continue to invest in our expansions in Saskatchewan and New Brunswick.

We know that potash capacity takes a long time to build and that this business rewards those who operate with a long-term view. We believe that time is near and that improving market conditions will allow us to demonstrate the power of our quintuple leverage in potash.

As potash demand grows, putting pressure on supply, we have an unmatched ability to bring on new capacity and to sell increased volumes in an improved pricing environment. As our production and sales volumes increase, our operating costs and Provincial mining taxes are reduced on a per tonne basis, further enhancing our returns. We also gain greater benefit from our investments in offshore potash producers, as improving conditions support their performance and the returns they generate for our company.

As we look ahead, we see the fundamentals in place that will allow us to demonstrate the true potential of Potash Corporation. We are a patient company with a long-term approach and we believe this will be rewarded in months and years ahead.

Based on current conditions, we expect full year earnings for 2010 to be in the range of $5 to $5.50 per share. This includes third quarter earnings of $0.80 to $1.20 per diluted share.

Rising demand for food is a powerful motivator and major buying regions have returned to the table. Farmers are eager to capture the economic benefits of their efforts and are making the necessary investment to protect the fertility of their soils. With our unmatched asset base and proven strategies, we can deliver on the expectations of customers around the world and deliver stronger performance for our shareholders.

Thank you for your time and your interest in Potash Corporation. I’m joined by members of our senior management team, which has undergone a transition since our first quarter call. Jim Dietz, formerly our Executive Vice President and Chief Operating Officer retired effective June 30th. Jim made major contributions to our company, but none greater than his leadership in our improved safety performance.

Some shareholders do not fully appreciate the importance of safety. Not only is it the right thing to do for the welfare of your people, but it is also indispensable to running a good company. On behalf of our board and our company, I want to thank Jim for his many years of dedicated service.

I’d also like to congratulate David Delaney, who accepted the role of Executive Vice President and Chief Operating Officer; and Stephen Dowdle, the new President of PCS Sales. David and Stephen each have more than 25 years of fertilizer industry experience and they have been terrific leaders for our company and for our industry. We are excited to have them taking on their new responsibilities.

With that, we’ll be happy to answer your questions.

Question-and-Answer Session


Thank you. (Operator Instructions) Your first question today comes from Vincent Andrews of Morgan Stanley. Please go ahead.

Vincent Andrews – Morgan Stanley

Thank you. Bill, wondering if you or somebody else from the team can go through sort of how the purchasing environment, or how your customers’ posture has shifted over the last month or so as commodity prices have come up, are you seeing any change in the desire to build inventory levels going into the fall or any sort of commentary around that would be helpful? Thank you.

Bill Doyle

All right, Vincent. I can tell you that we just came from the Southwest Fertilizer Conference down in San Antonneio and while the temperature was cooler this year, I would say the mood was a bit warmer, and when I say that, I mean enthusiastic and I would tell you that our customers are excited about this fall. They’re going to have an early harvest in Illinois and certain parts of Illinois we’re going to be harvesting corn the middle of August. So that will be some of the earliest corn coming off. But across the board you’re going to have an early harvest. With these crop prices now up, corn -- December corn in the $3.90 range, this will be the second most profitable year for corn farmers and they’re ready to go.

There is no inventory in the dealer system and so the fill that we’re looking at and that concludes at the end of this month and a couple days here, looks to be incredibly strong, record in many places. So I would tell you that there has been a change and you can see it in the attitudes.

I like to visit with some of my older friends that are not quite as optimistic as some others and listen to their sage advice and I found even the most oppressed of my friends were optimistic, so that gives you a pretty good feeling.

We are going to see a change here in granular potash, which I think is really going to be your first indicator of supply tightness, because what you’re seeing now is you’re going to have with an early harvest you’re going to have demand for granular potash domestically coincide with demand for granular potash in Brazil, which is also having a very strong season, when you have soybean prices up at the $9.80 level that provides very good margins for soybean producers. You have sugar prices up over $0.18, very positive for Brazil, which leads the world as the number one sugar producer, cotton in Brazil right now is hot.

I was on the phone with Brazil this morning. The Port of Paranagua of the leading import ports has a 17 day wait right now for ships to discharge and we’re just starting the shipping period, so these people maybe able to see their fertilizer sitting out in the port, but they can’t get their hands on it, so Brazil is tightening up.

And you’re going to see granular potash here over the next couple of months really become tight on a global basis and that will give you impetus for price increases in granular potash, which will start to lead the way in price improvements for the fourth quarter, so all of these points that we talk about that inflection point certainly what we’re seeing now in the U.S. and Brazil is one of those.


The next question comes from PJ Juvekar of Citi. Please go ahead.

PJ Juvekar – Citi

Yeah. Hi. Your potash realized price was lower than the other company that reported so far. I was wondering if you are selling more into Asia or Latin America that carried lower netbacks and what’s your potash price forecast for 3Q?

Bill Doyle

All right. PJ, I’m going to ask Stephen Dowdle to comment on that one. Stephen?

Stephen Dowdle

Yeah, PJ. We sell approximately 58% of our potash offshore and which as you know, the offshore prices are lower right at the moment than the domestic prices. And it’s difficult to compare our price realizations with others, as there are timing issues, as well as, product mix issues, as well as market issues that make apple to apple comparisons difficult.

There is, when we’re talking about quarter changes and we’re not in the same quarter. I think I know which company you’re referring to, but if you take a look at that, and you look at transportation, distribution, how those are treated and then you throw in the mix of other products, we’re pretty transparent in the way we report. It’s pretty easy to see our numbers.


The next question is from Edlain Rodriguez of Gleacher & Company.

Edlain Rodriguez – Gleacher & Company

Thank you. Good afternoon, guys. Bill, you talked about strength in Brazil, it’s supposed to be strong here yet prices are not able to go through. So with the exception of China, demand seems to have come back to near normal every where else and yet we’re not seeing the prices. Like is it a question of is it like a glut of capacity out there that’s preventing price from moving up and also can you talk about Canpotex and China and India where you are right now?

Bill Doyle

All right. Edlain, I will try and answer those questions separately. As I said in just my prior answer to Vincent, what you’re seeing now is granular potash tightening, so it hadn’t tightened to the point where those increases in prices have shown themselves yet, but as we’re moving on here and you start looking at the commitments of the month of July, which obviously is almost done here, but then what we’ve got on the books for August, I’m talking Canpotex into Brazil, very healthy month of August.

September I can tell you we could sell at least 100,000 tonnes more of granular right now that we won’t have because of our combination of U.S. and Brazilian combined demand for granular, so with that tightening coming, as I said you are going to see pressure on prices moving up here in the fourth quarter in Brazil and that will be the catalyst to get prices moving for the first quarter of 2011 in the standard market.

In terms of where Canpotex is with India and China, Canpotex is of course has contractual commitments quarterly basis in India and has been shipping against those commitments. China, we are expecting another contract with China before the end of the year, we had a little bit of a delay in that with the change in the management at Sinofert, which is probably going to delay the process a few weeks, but we expect Canpotex to certainly conclude some additional tonnage to China.

China is really in a very delicate situation, when you think about what’s going on with their grain production and you think about corn now being imported and we are very much the opinion that China is going to become a major corn importer.

As I said, they’re importing 1 million tonnes of soybeans a week. And they are going to be not only major corn importer and so when I say that this year the estimate is 1.7 to 1.8 million tonnes of corn. Next year could be three to five. A lot of people think they will be up at the 15 million tonne corn importing range before the end of 2015, but that also doesn’t mean that they won’t be a major potash importer. They’re going to do both because the pressure on meat, supplies in China is just enormous and when you have limited arable land, you need to address your fertility needs, which have been neglected here the last three years and there is going to be a big catch up in China.

So what I said over the last 20 years 10% annual growth average but we all know China doesn’t go average. And when China begins to grow again, it really pops and so our estimate is 11 million tonnes up from 8.5 million tonnes this year, 11 million tonnes of consumption for 2011.

We could be conservative. Because they’ve got that much pressure coming and they have been mining the soil and you can see it in their grain production. So that is the real delicate balance. China reengages and look out.


The next question comes from Bob Koort of Goldman Sachs. Please go ahead.

Lindsay Druckerman – Goldman Sachs

This is Lindsay Druckerman filling in for Bob. I hoping maybe you could just comment on the North America volumes in the quarter which seem to be a bit light versus expectation.

Bill Doyle

I’m going to ask Stephen Dowdle to comment on that.

Stephen Dowdle

Yeah. The North American volume in the second quarter, we had the mindset of the dealers that wanted to and they were determined to end the year with zero inventory. We had a record shipment volume during the first quarter and the second quarter was characterized by dealers buying that last truckload 100 times. And the result of that was that the season ended with inventory at levels that veterans in the industry told us that they’ve never seen before.

So our expectation is that as we move forward here into the third and fourth quarter that we are going to see the second half volumes be in the domestic market north of 4 million tones, which will be a normal volume for the second half and with the prospect of early harvest and an open fall application season, this estimate may be conservative.


Your next question comes from Jeff Zekauskas of J.P. Morgan. Please go ahead.

Jeff Zekauskas – J.P. Morgan

Thanks very much. Potash expects to ship about 7.6 million tonnes for the year and in the first half you shipped 4.4, so that would leave 3.2 in the second half or down 25%, but the thrust of your comments is that the second half should be pretty good and when you assess the overall market at 50 million tonnes, you said that in the first half you think the market grew 25 to 27 million tones, so the second half should be similar to the first. So why is it that you’re so conservative in your financial projections for potash production second half?

Bill Doyle

Well, Jeff, I think you got to remember we’re taking some shutdowns that we’re tying in for example at Cory, we’ve our new expansion. So we’re going to be down in Cory, I’m looking over Garth to October, what is it?

Garth Moore


Bill Doyle

October 4th, so we’re down now and we’re going to be down -- we have to tie into the new head frame and there is all part of the process of bringing on that new capacity there and then just our other shutdowns. This is what I’m saying, this combination of demand in the U.S. with an early fall coinciding with demand in Brazil for the normal planning season, the normal planting season is October, November but they have to take the material now when you have Paranagua delays and all the problems you get, it takes time to get it there and you combine that with shutdowns. And it’s not just North America maintenance shutdowns. You got shutdowns around the world.

But you’re going to see a dip in potash inventories quite a substantial dip in potash inventories between now and September, and it is just a function of all of those things working at the same time. So, I think, that’s what you’re not taking into account and the market might be a little bit better than we think, but as I said, this year we’re going to take it one quarter at a time and everybody says prove it to me, so we’re just going to, I guess, we’re just going to have to prove it. So, I guess, that’s where we are.


Your next question comes from Jacob Bout of CIBC World Markets. Please go ahead.

Jacob Bout – CIBC World Markets

Good afternoon. Had a couple of questions here on the supply/demand. So first of all on the demand side, you mentioned that you expect global potash demand to be 55 million tonnes in 2011. Now, that’s 2 to 3 million tonnes higher than some of your competitors and what various industry associations are talking about. Maybe you can walk us through what your assumption is for some of the major markets?

And then maybe if you can comment a little bit on what you see happening in 2012 like from what I’ve seen, it’s not a whole lot of capacity coming online in 2010, 2011, but as we look out in 2012 there is quite a bit of capacity coming online from not only Canpotex, but Russia, Dead Sea and China? Thank you.

Bill Doyle

Well, I don’t know about that last contention, Jacob. I’d debate that with you because a lot of those projects have been delayed and pushed out. I mean, I know, what we’ve got going on. But I don’t see it even in other Saskatchewan. I don’t see that, so we’ll debate that with you on the telephone afterwards.

In terms of where we are for, let’s talk about ‘10, first of all. We said 50 million tonnes from the beginning of the year and everybody said that’s too high, that number is too high and all of your competitors are saying the number is 44 or 45, and those competitors have been coming up, just watching them creep up here with their various calls and we still at 50, and we think the number, we don’t have the official statistics for the first half, but when you run the numbers somewhere between 25 and 27 million, and if you keep in mind all of last year we were at 29.2.

So we almost came up in the first half to ship as much as we shipped all last year. So that 50 number we feel that’s looking like we thought it was at the beginning year to be a recovery year and a substantial increase, up from the 29.2 of last year.

If you look at 2011, I’m not going to get into 2012 because I’m not that smart. But 2011, if you look at some of the major markets, I already talked about China, 11 million. I’m talking consumption here and these are both domestic and imports.

So if you take from 8.5 this year, which is our forecast for China up to 11, if you think about Brazil, and again you’re talking about domestic production in Brazil and imports, this year Brazil is going to be 6.5 and that number is 7 for next year that 6.5 might be a little low this year, I’m not sure. By the time it all ends but we’ve 7 in our numbers for next year and if you look at India, we’re 6 this year and we see 6.3 for next year.

And then, if you want to look at other Asia, which is the big players there, Indonesia and Malaysia, we’re at 6 this year and we’ve got them for 6.3 next year. So that 55 million tonnes number, remember what I said, it doesn’t have any inventory rebuild in there, that’s just consumption.

And, so if you get inventory rebuild, if the inflection point comes when the supply/demand tightens up and the price starts to move, you will see some inventory rebuild too, so that’s not in there, but that’s a real possibility.


Your next question is from Fai Lee of RBC Capital Markets. Please go ahead.

Fai Lee – RBC Capital Markets

Thank you. Bill, regarding your commentary earlier about an inflection point, the real excitement for the potash market maybe when China comes back in full force as you mentioned for 2011. What’s your best estimate on when China will start stepping into the market for 2011, supply do you think will be in January, February or later, or do you think they can move earlier if they see granular prices moving up as you suggest could happen in Q4?

Bill Doyle

Fai, let’s Stephen Dowdle spent more time in China than anyone that I call a dear friend. I’m going to let him comment on that first.

Stephen Dowdle

You know, with the attention that the Chinese government has been giving to their production issues and their yield stagnation, particularly in corn and soybeans, it’s such a high level that it’s our expectation that this process of increasing a potash consumption that we will see evidence of this process in the second half of this year.

Bill Doyle

As I said earlier a little bit of delay I think with the Sinofert management change, this new CEO gets his feet on the ground. But we think Canpotex will conclude another contract with Sanford before the end of the year.


Your next question is from Elaine Yip of Credit Suisse. Please go ahead.

Elaine Yip – Credit Suisse

Hi. Hello. How are you? You know, question on the phosphate and nitrogen side. For those businesses you increased your gross profit assumptions for the full year in a couple of consecutive quarters. Can you talk about what’s driving the better outlook there?

Bill Doyle

Elaine, I’ll let Stephen Dowdle talk about that one as well.

Stephen Dowdle

Elaine, its all price. The volumes haven’t changed significantly, but the price expectations have. The market right now we see in both nitrogen and phosphate markets, anywhere from $30 to $60 price increases here in the last three weeks. So we expect that this is going to have an impact on our gross margins.

And what we’re also seeing in the industrial market, higher expectations from our industrial customers about their demand in the second half. They were very conservative in the first half about their second half outlook and now they realize that their demand in the second half is stronger than they had anticipated and we’re seeing that reflected in the market. We’re seeing that reflected in the ammonia market and the recent strength in the ammonia price is evidence of that.

Bill Doyle

Elaine, I’d add just one other thing and that is the consolidation that we saw in the market earlier this year has resulted in a new approach by that new company to the marketplace and I can tell you in a product like UAN that’s made a huge difference. There’s a lot of pressure there to show the earnings that’s required to justify the purchase price, I guess.


Your next question is from David Silver of Bank of America Merrill Lynch. Please go ahead.

David Silver – Bank of America/Merrill Lynch

Yeah. Hi. I’d like to go back to maybe a question about the global potash market, a couple people have asked, maybe I’d like to frame it in terms of Canpotex and their global market share. And I think what I’d like to do is compare Potash Corp. shipments in 2007 and 2008 to maybe what you are seeing in 2010 and 2011.

So in 2007 and 2008 I think Potash Corp. shipped a combined total of about 18 million metric tonnes and if I look to what you’re projecting for 2010 and 2011, I think it is going to be a little less than that and if you think that your global demand numbers are right, demand should be roughly the same 2010 and ‘11 versus ‘07 and ‘08.

So would Canpotex’s decline in market share over that period, would that be related to a different competitive dynamic? Is it more difficult to sustain pricing playing your role of swing producer? Could you just comment on that, please? Thank you.

Bill Doyle

Yeah. David, if you look at it just on the surface, you might come to that conclusion. What I’d say to you is when the market is weaker, so if you look at 2009 and the global shipments were 29.2 million tonnes of potash, Canpotex took the biggest hit, of any supplier in the world and I can tell you as the biggest member of Canpotex we took the biggest hit of any supplier in the world and that’s just the way it goes. It has been our approach because it has been in our best interests to do that. As long as it continues to be in our best interests to do that, we’ll do it.

I think as will you see this market recover, Canpotex’s market share will grow and especially as we come up against very tight supply, when you talk about 90% operating requirements for 2011, that’s getting up there and you’ll start to see and if you get the inventory replenishment, that puts it up even higher and that’s when we start to take our share again.

That’s when Canpotex starts to grow its share, so it’s a little more fluid than you would might surmise by looking at the numbers, but if you understand what happened and what has historically happened, Canpotex’s share in a softer market always declines more than any other producer in the world when the market is strong, Canpotex’s share grows faster than anybody else and basic reason is because they’ve got some producers that have the capability to supply.


Your next question comes from Mark Connelly of CLSA. Please go ahead.

Mark Connelly – CLSA

Thank you. Bill, just following up on Fai’s question, when you think about the impact of the droughts and now the floods in China and the drought in Russia, is there some risk that the rebound in demand may come later because they just aren’t going to need it or aren’t going to be able to get it through as early? I’m just curious how you think about the impact because the impact has been pretty massive in China whether it is going to push things back or accelerate. Certainly it increases food demand, right?

Bill Doyle

Yeah. I think what are you seeing is that these grain prices are very reflective of the current production and I think, we’ve crossed the threshold here with China importing corn now and we see it on a permanent basis. And just visiting with various customers of ours in San Antonio earlier this week, everybody is looking at $4 as the floor and moving to $5 here in the not too distant future, certainly by the end of next year, you’re going to see a lot of pressure towards $5 corn and it is just China going to be a player in the corn market, and when you think about China not so long ago was a 15 million tonne exporter, and when the market was 75 million tonnes of corn exports, China was 15 million tonnes exports. And now the forecast by a couple reliable people who study the marketplace are going to say it is 15 million tonne corn importer by 2015. That’s a huge change.

And when you combine that with their need for potash, just to keep reasonably in good shape in terms of meat production because all of that grain when you think 75% of China’s corn production goes to feed animals today, and when you look at the demand for those animals, growing as fast as it is, but they have to come at it both from the import of corn and the import of potash because they need both, because that escalating factor is moving so fast.

So, I don’t think that there is going to be the delay. There might be some logistical issues, but one of the things that we were planning on when we started our expansions in 2003 was to be ready when the time came and we think we’re going to be ready.


Your next question is from Michael Picken of Cleveland Research. Please go ahead.

Michael Picken – Cleveland Research

Hi. Good morning. Just a question on the cost side and I know you guys have a number of shutdowns sort of planned for the third quarter and I’m just wondering if you could sort of give us a hand on in terms of operating rates, where you expect to be in potash for both the third quarter and as well as the fourth quarter, and what that might do to your average cost per tonne if you could give us some sort of ballpark direction, presumably it should be I would assume higher in the third quarter than it was this quarter just because of your lower operating rates, but if you could provide a little more color around it, that would be great?

Bill Doyle

All right. Michael, I’m going to ask Garth to speak to that one.

Garth Moore

Yeah. Our operating costs in the third quarter a lot of us our normal maintenance shutdown costs those costs are amortized across the 12-month period so they aren’t really going to have a major effect on the unit cost of production. And as far as our operating rate for the total year right now we’ll be running at about 70% of our operational capability for the entire year as we go forward.


Your next question is from David Begleiter of Deutsche Bank. Please go ahead.

David Begleiter – Deutsche Bank

Thank you. Bill, you talk about some operational capability. What’s the risk that number is 1 million to 2 million tonnes higher next year as obviously name plate is much higher than operational?

Bill Doyle

Are you talking about us or are you talking about global?

David Begleiter – Deutsche Bank


Bill Doyle

I think that risk is not very great. When you look at where people are this year, when you think about you look at the Russians and the Belarusians, they’re producing everything they can right now. If you look at the Israelis, producing everything they can. If you look at the Germans, producing everything they can.

Really the only area of the world is not producing full out is Canada. So I just don’t see the risk of there being operational capability for 2 million tonnes more. I don’t know where it is and they don’t have any expansions that they’re bringing on during that period of time.


Your next question comes from Sam Kanes of Scotia Capital. Please go ahead.

Sam Kanes – Scotia Capital

Thank you. I’d like to switch horses to phosphate rock reserves, an area that is sticky at $100 per tonne and we saw an asset sale or equity sale well over two times the cost of developing Bayovar in Peru. And I’m wondering where you sit currently. You’ve been very quiet on your North Carolina position. I know it is double the length of reserves relative to Florida. Florida is under pressure here and increasing pressure on permitting.

Do you have any permitting issues coming up the next while, have you fully explored your North Carolina reserves, I imagine you have? And how is your cost per tonne moving there versus your competitors in Florida on a longer term basis?

Bill Doyle

I’m going to split that question with Tom Regan. I’ll just answer the easy part which is permitting part, life of mine permit in Northern Florida at our White Springs operation so we don’t have to worry about another permit there. In North Carolina of course we just got a 35 year permit in North Carolina, so we’re in good shape on the permitting side, which is obviously a big issue that’s in the press these days and we think it is a big advantage for our company not to have those type of issues. Tom, do you want to talk about the second part of that question?

Tom Regan

You know, relative to the operations, I would say that in both White Springs and Aurora, our focus is on costs because we consider that to be an advantage. And I’m not going to quote numbers, but I can tell you that we feel pretty good about the progress we’re making on costs, especially with the idea that we have these permits in place and so our attention is not diverted toward permitting issues, and I would continue to say that I feel that we do have a cost advantage, especially when we look at the world market for corp.

Bill Doyle

The other thing, Sam that’s changed a little bit here is the pressure on the non-vertically integrated phosphate producers has really ratcheted up and you have seen an announcement by Agrifos that they’re going to actually stop producing phosphate altogether. You have other players around the world that are in that same position that I don’t see having a long lifespan ahead of them.

And so then you balance that out with Maaden coming on, when you look at Maaden, Maaden is probably really two years away from now from having any meaningful production. So phosphate really -- there has been some change in phosphate and it is of course based on the rock and the rock is the fundamental of the business, and so those people that have exceptional natural capability in the rock supply, low cost, low impurities, low pumping distances to the phosphate plant, they’re in the cat bird seat.

And it says to me that phosphate is going to be a little more balanced, that I don’t think you’re going to see the severity of the impact that we originally thought with Maaden coming on. So we look for earnings in the phosphate area to be a little bit better over the medium-term than we thought at one time.


Your next question comes from Martin Lavigueur of Macquarie. Please go ahead.

Martin Lavigueur – Macquarie

Hi. I was just wondering if you could just discuss some of the developments in terms of Russia with Eurocali obviously having a major shareholder encouraging the company to look at taking positions in Sylvanet and also Belaruscali and whether or not you think that this is really and what it could mean for the potash market? Thanks.

Bill Doyle

Well, Martin, I don’t have any more insight than you do. I mean, you read in the press various comments, of course they’ve got new players. You’ve got one fellow in particular that took over the biggest piece of the (inaudible) holding in Eurocali, and he seems to be saying to Bloomberg and Reuters and others that his interest in Sylvanet and interest in Belaruscali and a lot of rumors going on but I don’t know really what will happen in that arena. It had a limited chance in the past because there was a personality clash of between the (inaudible) and the folks at Sylvanet, maybe with the sale there that’s less of an issue.

And there has been other rumors of Belarus selling the piece to China and China was going to end the potash world by taking over a piece of Belaruscali selling a piece and China was going to end the potash world by taking over Belaruscali, and of course then wouldn’t have really made too much sense if you think about potash being one of the most important natural resources in Belorussia, why the government would give away the future value of that resource, that never made much sense to me. But, anything is possible. I -- with a change in characters with change in players, there might be something there.


Your next question comes from [Pat Benjamin] of Stifel Nicolaus. Please go ahead.

Pat Benjamin – Hayes Unicon

Hi. Thanks. It is [Pat Benjamin for Hayes Unicon]. And thank you for taking my question. It’s a two tier question, one of them. The first part is about sulfur prices. Could you shed some light on what your sulfur costs is?

And the second question is about the Maaden project, taking the few the Maaden won’t come online for the next two years, we do have an excess supply of ammonia because it is also an ammonia plant of around 400,000 tonnes annual that they could export. So if you could just shed light on how that will affect ammonia prices and ammonia global supply and demand? Thanks.

Bill Doyle

All right. Pat, I’m going to ask David Delaney to comment on both of those issues. David?

David Delaney

Regarding sulfur prices, we’ve seen a lot of pressure in the sulfur market in the last 30 days. We just concluded our third quarter sulfur price at $95. In reference to the ammonia market and the incremental Maaden ammonia coming on line, we think with the industrial demand that has picked up quite dramatically here in 2010, along with high operating rates in the phosphate industry, high gas costs for the former Soviet Union and Ukraine, that that would likely not have a lot of impact on the ammonia price going forward. We’re pretty bullish on ammonia prices.

Bill Doyle

Yeah. Pat, just to add when we talk about Maaden, it’s not that they won’t be starting up, start their rock mine and get the rail working and a little piece, but for any appreciable tonnage it is going to be two years. It just takes that long to ramp up production. Everybody thinks you build the plants and turn the light switch on and it works full capacity the first day.

I mean, it is no different in Potash has ramp up time there as well and these are huge industrial complexes that when you get to phosphates there is a little chemistry involved, so you have to bake the cake a certain way as well. So it takes a little longer than people think.

Denita Stann

Rick, we’ll have time for just one more question.


Thank you. The final question today comes from Hari Sambasivam of National Bank Financial. Please go ahead.

Hari Sambasivam – National Bank Financial

Yeah. Thank you. I have a quick question about China. Now, Canpotex generally has not had a substantial market share in China, so I’m wondering in terms of participating in China’s growth what exactly does Canpotex do to gain that share. So I’m just wondering typically it has been a lower priced market than the rest of your Asian markets. Is there something that Canpotex is willing to sort of maybe take a price reduction of some kind or are there other ways of participating in the Chinese market growth as you go forward? Thank you.

Bill Doyle

Well, Hari, if you go back in time, we just a little bit of history and not that long ago and I’m talking about early ‘90s, when the Russians weren’t exporting anything before the collapse of the Soviet Union of course Canpotex took the biggest share in China. And over time, over the years, the Russians, bringing more and more tonnes into the marketplace, became the biggest supplier to where if you look at the three Belaruscali, Eurocali, Sylvanet, they are about 60% of the market today.

They also have the advantage of being able to come in via rail, so that has changed over the years and Canpotex in recent times has had about 30% market share in China. And I think that that’s probably the number that the Canpotex members have in mind where we should be and the Chinese price when you think about lower prices in a weaker market, it’s a lower price and stronger markets that price comes up and remember we had a $400 increase in one negotiation in China.

So I think it is sort of fits with my earlier comments that as this market accelerate and as demand comes back and you get to up against higher operating rates, and you see that pressure that inflection point that we’re talking about, these things change.

There is a fluidity in it, and you will see Canpotex become even a larger market share in China over this next 10-year period because when you think where China is going to grow and who has the tonnes, it’s the Canadian members, and I can speak for Potash Corporation because we know what we’re going to have between now and 2015, and that’s operational capabilities 17.1 million tonnes, 18 million tonnes of capacity.

China is going to -- they’re going to need those tonnes and so Canpotex, without any expansions at these other places and keep in mind Sylvanet, which spent all of that money on the reserves, $1.5 billion on those reserves adjacent to the property haven’t spent a nickel to put in a new facility there. So that’s quite a ways away and then the change in ownership of Eurocali, their greenfield project has been put on hold. And so China is going to be more dependent on Canada over the next few years and you’ll see the market share become more fluid again and Canpotex will increase its market share.

Denita Stann

Great. Thank you everyone. If you have any questions, please don’t hesitate to give us a call at the office. And have a great day.


Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect your lines.

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